1. Field of the Invention
Exemplary embodiments of the invention relate to the art of methods for assessing operational risk and, more particularly, to a system and method of assessing operational risk employing market-based information processing.
2. Description of Background
Various regulatory frameworks, such as BASEL II, require industries, in particular banking and insurance, to quantify operational risk. Identifying different risk sources and correctly modeling dependencies between separate sources of risk makes quantifying operational risk a complex task. Moreover, gathering meaningful risk-relevant data to input into mathematical risk models is very difficult and, as a starting point, is essential to quantifying operational risk.
At present, enterprises manage market risk by relying upon specific financial products that are based on prices of underlying stocks, bonds, or similar products. Financial markets relatively accurately price the underlying products. Structured products and derivatives are used to minimize or mitigate risk. Companies manage credit risk by relying upon large data sets of historic, socio-demographic, and geographic information as well as credit ratings. Companies manage actuarial risk by using large historic, socio-demographic, and geographic data sets that aid in identifying risk groups. Operational risk, on the other hand, is more difficult to assess.
Gathering reliable input data for the quantification of operational risk is difficult. Companies have individualized structures that are typically not shared with outside groups. In addition, in order for companies to remain competitive, internal structures must be adaptable to meet market changes. Moreover, most operational risk data is based on implicit information and intuition rather readily definable metrics. Finally, employees have no incentive to share risk-relevant information with fellow employees or management. The flexible nature of the internal business structures, implicit information lack of employee incentives as well as various other factors hinder companies from systematically gathering meaningful risk data and deriving meaningful risk estimates.